The third way is the simplest and most important. See if you can do it.
No matter how old you are, there’s most likely a retirement looming in your future, and if you’re not financially prepared for it, you’re setting yourself up for a lot of stress and trouble. It’s true that this isn’t an urgent matter if you’re still only in your 20s or 30s, but young people who start saving for retirement early may be able to not only retire comfortably, but perhaps also retire early!
Here are three great ways to invest for retirement, no matter how old you are.
1. Invest regularly and effectively
Check out the table below, which shows what can be accomplished if you save and invest regularly and invest effectively.
| GROWING AT 8% FOR | $7,000 INVESTED ANNUALLY | $15,000 INVESTED ANNUALLY |
|---|---|---|
| 5 years | $44,351 | $95,039 |
| 10 years | $109,518 | $234,682 |
| 15 years | $205,270 | $439,864 |
| 20 years | $345,960 | $741,344 |
| 25 years | $552,681 | $1,184,316 |
| 30 years | $856,421 | $1,835,188 |
| 35 years | $1,302,715 | $2,791,532 |
| 40 years | $1,958,467 | $4,196,716 |
CALCULATIONS BY AUTHOR.
There’s no perfect sum to invest at any particular time. We all have different incomes and different abilities to sock money away. The table above shows what you might amass investing $7,000 or $15,000 annually (which is, respectively, $583 or $1,250 per month), but you might be able to invest much more or much less.
Also, the amount you can save and invest will likely change over time, too, as your earnings change. Aim to be fairly aggressive, because your earliest invested dollars are your most powerful ones, since they have the longest period in which to grow for you.
To invest effectively, aim to meet or beat the overall stock market’s average annual return with your long-term money. (Short-term money shouldn’t be in stocks, as the stock market can be volatile from year to year while growing in the long run.) Over many years, the stock market has averaged roughly 10%, though it can be more or less over the particular years in which you’re invested. (Thus, the table above assumes 8% annual growth.)
You can earn roughly the stock market’s return via one or more low-fee, broad-market index funds, such as the SPDR S&P 500 ETF (SPY), Vanguard Total Stock Market ETF (VTI), and Vanguard Total World Stock ETF (VT). Respectively, these will have you invested in 80% of the U.S. market, all of the U.S. market, or most of the world’s stock market.
If you want to try to beat the market, consider adding some growth stocks to your portfolio — but know that you’ll then have to keep up with them. Index funds require very little of your attention.
2. Invest using tax-advantaged accounts
Another great way to invest for retirement is to do so within tax-advantaged accounts such as IRAs and 401(k)s. Both come in two main varieties — traditional and Roth.
A traditional account receives pre-tax contributions, shrinking your taxable income and therefore your tax bill for the year of the contribution. A Roth account, on the other hand, is funded with your post-tax money, so your taxable income and tax bill will be unchanged. Here’s what’s great about Roth accounts, though: If you play by the rules, all your withdrawals in retirement can be tax-free. That can be a big deal.
Imagine, for example, that you retire with a Roth IRA account worth $500,000. You’d be able to use every dollar in retirement without paying any of it in taxes. Read up on these accounts before focusing on Roth ones, though, as traditional accounts make sense for some people.
Many 401(k) plans let you put some or all of your money in index funds, so see if you can do so. If your employer matches contributions to any degree, aim to contribute enough to max out that match, as it’s free money. And remember to try to increase your contributions from year to year, too, as you’re able.
3. Invest with much patience
This last best way to invest for retirement may be simple, but it’s actually the most important one: Be patient. Remember that impressive table of potential earnings up top? Those big numbers only happen if you stick with it over many years, through good and bad times, healthy and ailing economies, market downturns and market upturns.
So don’t let yourself get discouraged and stop investing. If you think you might, read up more on investing in order to develop more confidence in your plan. If you’re really diligent, you can build yourself a very comfortable and financially secure future.